Bellwether or not, Infosys beats TCS, HCL, Wipro in cash flow

BANGALORE: Infosys, whose bellwether tag for India's software industry is questioned by faster growing rivals, had better cash flow and receivables than rivals HCL Technologies and Tata Consultancy Services over the past nine months. At a time when outsourcing customers are delaying decisions and asking for longer credit, investors and experts are beginning to get concerned about a worsening receivables position at TCS and HCL - known more for outpacing Infosys in growing their revenues.

During the nine-month period from April to December, Infosys' operating cash flow was almost 80% of revenue, compared to less than 50% each for TCS, HCL and Wipro. The days sales outstanding (DSO), which is defined as a ratio of account receivables and total revenue, is another metric where India's second-biggest software exporter scores over domestic rivals. During the third quarter ending December, Infosys' DSO or debtor days was 62 days compared with Wipro's over 90 and TCS' 84 days. Overall, Infosys is able to collect monies due from customers faster than rivals, which helps it maintain a healthy cash flow.

"If you look at the last two downturns in the business - one in 2001 and another in 2008 - in both the times, we have come out as winners only because of our focus on quality of profits and the financial discipline we have exhibited. We are very particular about not getting into commoditized businesses and make sure we focus on high quality growth," said V Balakrishnan, chief financial officer of Infosys. He denied that this drive for profit and better cash flow is coming at the expense of growth.

"I don't think, this is hurting our growth. There is no short cut to being a quality player in the industry." Analysts say the past nine months reflect worsening receivables position among tier 1 Indian tech firms, barring Infosys. "Infosys has shown the best profit conversion to operating and free cash flow among Tier-1 techs while others have lagged, although the Dec 11 quarter saw some reversal at TCS and Wipro," CLSA analysts Nimish Joshi and Arati Mishra said.

But in an industry with aggressive rivals like TCS and Cognizant on one hand, and globally entrenched firms such as IBM and Accenture on the other, Infosys will need more than its cash discipline to gain market share. "Infosys' focus on not bidding aggressively for the commoditised work has helped offshore pricing but has come at the cost of volume growth," CLSA's Joshi said.

Infosys maintains that it is not sacrificing growth. "Even if you look at the last quarter (December), our revenues have grown the fastest amongst all the large offshore players," said Balakrishnan . Infosys' sequential revenues were up 3.6% in the October-December period, compared to 2.4% revenue growth for bigger rival TCS and 2.2% for Wipro. Analysts, however, continue to raise concerns about the company's growth after it gave a flat guidance for the fourth quarter and reduced its growth guidance for the full year. According to them, Infosys' forecast reflects the company's internal troubles rather than an industry-wide slowdown.

"The company guided for flat revenue for March versus the street's expectation of 3-3 .5% growth. Management continues to see uncertainty in the demand environment , and slower decision making. We note that revenue from its top client declined 8% QoQ. Also, we are unclear whether the sales and execution engines have stabilised completely post the last round of organisational restructuring," Credit Suisse analysts Anantha Narayan and Sagar Rastogi wrote in a report following the company's results.